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Oil Dollar Euro ULP

I'm interested by the claim repeated in numerous news analyses that "investors are buying oil to hedge against the sliding greenback" - and also the likewise repeated claim that we are only now in record territory, because the oil price reached an inflation adjusted USD100+ in 1980. Both of these statements point us toward looking carefully at the history and current position in terms of what has actually happened in oil prices, inflation generally, exchange rates, and various measures of energy intensity - ie what you actually get out of a barrel of oil in terms of, for example, mileage or production generally.

US Inflation

Let's start with the inflation claim. A useful CNN article from a couple of weeks back explains some of the complications:

Crude prices are within the range of inflation-adjusted highs set in early 1980. A $38 barrel of oil then would be worth $97 to more than $104 today, depending on the how the adjustment is calculated.

A direct comparison with daily Nymex prices is difficult because historical data, gathered before the crude futures contract was created in 1983, are based on average monthly prices posted by oil producers.

Different analysts have varying benchmarks for an inflation adjusted high. For example, John Kingston, director of oil at Platts, the energy research arm of McGraw-Hill Cos., arrived at an all-time high of more than $104 a barrel, which he said adjusts for delivery costs to and from Cushing, Okla., the Nymex crude oil delivery terminal. Using his own inflation adjustment, A.G. Edwards & Sons oil analyst Eric Wittenauer arrived at a widely-quoted estimate of $103.76.

However, an inflation calculator maintained by the Bueau of Labor Statistics estimates that $38 in 1980 is worth $97.34 today. A Federal Reserve Bank of Minneapolis calculator puts $38 in 1980 dollars at $99.43 today.

Aussie Inflation

From our point of view at the edge of the world economy (geographically, anyway), we can add further complications of our own exchange rate and inflation. Fascinatingly, the Aussie in March 1980 was worth ... US92¢ ! - so no significant exchange rate adjustment needed. Australian inflation since 1980 (using the RBA inflation calculator) is a little over 250%, so, working it through: a US$38 barrel in March 1980 was A$41.30, inflated to today is A$145.80, which at  today's rate of 94.6¢ is US$138. I leave it to the economists among you to work out just why the difference - and the underlying question of why the exchange rate and inflation rates have diverged so much. Actually, to help you with this piece of homework, you probably only have to wonder about the last two years, since the equivalent figures in April '06 would have been: Aus inflation 232%, inflated barrel A$137.30 at US74¢ = US$101.60, which is pretty much exactly in line with the inflated figure for the US at that date.

Exchange Rates 

Unwinding ourselves from the convolutions of the calculations in the last paragraph, we can see that the 26% increase in the USD value of the Aussie dollar over the last two years has been a substantial analgesic against the pain of the 57% increase in the oil price over that time.

I am, of course, being Aussie-centric in that paragraph: the trade-weighted index for the Aussie is only up 12% since April '06, and the USD is 11% of the TWI, so around two-thirds of the analgesic came from the general fall in the US dollar against everyone else, and one-third from the appreciation of the Aussie against everyone else.

This brings us back to that claim that the price rises are currently being driven by the fall in the dollar. In 2008 so far, the headline West Texas Light Crude oil price is up a nice round 10%, from $100 to $110, while the dollar against a not-randomly-chosen euro is down 3.3% (from 0.666€¢ to 0.645€¢). In fact, it is probably worth at this point looking at a slightly longer history of oil prices in euros vs dollars (and we'll get the Aussie in at the same time, for completeness). To save space, I've only included the points at which the oil price crossed a headline round ten-dollar increment.

WTLC   when?     €:$    price in €  A$:US$  price in A$
$110    Mar-08    1.55    € 70.97    0.93    $118.28
$100    Dec-07    1.5      € 66.67    0.87    $114.94
  $90    Oct-07     1.43    € 62.94    0.9      $100.00
  $80    Aug-07    1.38    € 57.97    0.83    $96.39
  $70    Apr-06     1.23    € 56.91    0.74    $94.59
  $60    Jun-05     1.22    € 49.18    0.77    $77.92
  $50    Jan-05     1.31    € 38.17    0.77    $64.94
  $40    May-04    1.2      € 33.33    0.7      $57.14
  $30     Oct-00     0.82    € 36.59    0.53    $56.60
  $20     Jul-99      1.03    € 19.42    0.66    $30.30

The first and most obvious thing to say from this table is that the dollar has been pretty steadily depreciating against current strong currencies like the euro and the Aussie for a very long time: the euro to dollar rate is pretty much a straight line from 2000 to 2008, with a pimple on it in early 2005 and just a tad of acceleration in the last six months. The Aussie to greenback chart is almost identical apart from a wider pimple.

The oil price chart, on the other hand, wobbles around all over the place until 2004 (there are three separate places where the $30 mark is passed for significant periods of time), climbs fairly steadily at around a $ a month until mid-2007, then accelerates to a steady $10 per quarter from then on. There is no real relation between this graph and the dollar depreciation graphs at all.

Well, it may yet be part of the explanation, but there's no evidence here for the "depreciation drives price" theory: the (over-simplified) euro-denominated price graph is interesting enough to include here:

The underlying shape is the same as the USD oil price graph but has those two interesting flattish areas - on the face of it, there is some evidence to suggest that  the oil price has been fairly steady denominated in euros for quite long periods of time, but has in fact accelerated over the last year in exactly the same way that the USD price has.

Also, prima facie, unless whatever forces are driving the oil price change, we can reasonably expect this trend to continue, and see the next few milestones as $120 in June, $130 in August/September, and the mid-$140s at the year end. Of course, if we took our trend of the last two weeks,  it would all be a lot faster than that.

What happened in mid-2007?

One thing that didn't happen was that world economic growth didn't accelerate - in fact, it began to slow down, which on the face of it should have taken pressure off of prices. Here's CNNmoney again:

Back in October, when oil prices were near $90 a barrel and the economy was still humming along economists said high oil prices shouldn't cut into economic growth. The economy used oil more efficiently than it did in the 1970s, and spending on gas was just a small percent of people's budget, the experts said.

Fast forward to March and you've got a sputtering economy, and economists saying $105 oil deserves a big part of the blame.

We've already noted that the dollar depreciation curve did accelerate, but by nothing like the extent that the oil price did.

So, what did happen? Well, here's a handy table extracted from the International Energy Agency World Oil Balances report:

    Date       World Oil Supply      World Oil Demand
    1Q2006         85.4mbd               85.5mbd
    2Q2006         85.1mbd               83.4mbd
    3Q2006         85.7mbd               84.4mbd
    4Q2006         85.4mbd               85.7mbd
    1Q2007         85.6mbd               86.0mbd
    2Q2007         85.2mbd               85.0mbd
    3Q2007         85.2mbd               85.6mbd
    4Q2007         86.4mbd               87.2mbd
mbd = millions of barrels per day

Now, can we notice something here? What's the trend in the supply column? And what happened in 2007? And does it help if we point out that the IEA forecasts demand to average 87.6mbd through 2008? So, unless supply grows, demand will exceed supply by a little over 1mbd throughout 2008,

And might we apply a little very basic economic science here to predict what happens to prices when demand exceeds supply consistently every day?

What about OPEC? Are they holding us to ransom?

That extra 1.2mbd in the last quarter of 2007 essentially all came from OPEC, despite the fact that OPEC now only accounts for 42% of world supply, Since the IEA forecasts no increase at all in non-OPEC supply in 2008until the fourth quarter, if there is no increase in OPEC supply, then there will be no day in 2008 in which supply meets demand, hence continuing upward pressure on prices - and presumably at some point real market failures as the low bidders fail to acquire enough oil to do whatever they wanted it for.

On the other hand, OPEC now claims that there is no supply problem that justifies a further increase in OPEC production.

OPEC members meeting in Vienna decided to hold production levels flat, insisting oil markets are well supplied and blaming record prices on factors outside the cartel's control, including speculators and the "mismanagement" of the US economy

The most recent OPEC Monthly Oil Market Report, February 2008 [1MB pdf], says:

The demand for OPEC crude in 2007 is expected to average 31.9 mb/d, an increase of 0.3 mb/d over the previous year. In 2008, the demand for OPEC crude is expected to average 31.5 mb/d, a decline of 0.4 mb/d.

Why do they think this? - not because they anticipate a worldwide recession:

World growth is now expected at 4.6% compared to average growth of around 5% in the last five years.

On yet another other hand:

World oil demand is forecast to grow by 1.2 mb/d in 2008 to average 86.99 mb/d, slightly down from our last MOMR estimate. (p24) [and] Non-OPEC supply is expected to average around 50.53 mb/d in 2008, an increase of 1.07 mb/d over 2007 (p28).

... so world demand is going to grow, and non-OPEC supply is going to grow less than that (and the IEA doesn't agree it's going to grow at all) - but OPEC demand will fall - does not compute, surely ... Well, actually it's an artifact, driven in the detail of the forecast entirely by a much larger forecast drop in demand in the second quarter, as the northern hemisphere warms, than that forecast by the IEA, combined with the assumption that the non-OPEC supply growth continues and OPEC demand is the difference between the two.

Just why is OPEC playing down the potential demand? Are they "holding us to ransom", as is so often proposed? Why won't they increase the production quotas? But for the last several years OPEC has done nothing at all to discipline countries that breach their production ceilings, and current and forecast OPEC crude production exceeds the current ceiling by more than 2mbd. Many observers believe that OPEC is up against a different kind of ceiling - not a quota, but actually producing all the oil their current facilities will allow, and will not be able to increase beyond this whatever happens to prices or demand. If so, the "weapon" of OPEC quotas has no ammunition left.

The US Energy Information Administration is, as usual, more optimistic, opining that OPEC has 2-3mbd of spare capacity. However, 1) that was before the 1mbd increase in OPEC production over the last five months, and 2) what remains unused is not the light sweet crude under demand, but heavy sulphurous stuff from Saudi. Even if the EIA is right, the bringing of all OPEC capacity into full flat-out production would only just satisfy demand - and any interruption of any sort by refinery accidents, hurricanes, civil disturbance, whatever, will drop total supply back below total demand, and kick the prices up again.

Not Peak Oil

Note that this is not a Peak Oil argument, but a simple extrapolation from known data for the last and next years: supply is not currently meeting demand, and won't do for the rest of this year.

Of course, if the Peak Oilers are right, then this might be a permanent position, but we'll restrict ourselves to the known for the rest of this piece.

What does it mean for oil prices?

Being a very classical economist for a while, the simple answer is that oil prices will continue to rise until they have suppressed demand back to match supply. Taking the various forecasts we've already referenced, demand is forecast to grow by 1.8% in 2008 (year-on-year growth from 86mbd to 87.6mbd), and this is from a forecast world economic growth of around 4.5%. If supply is short by 1mbd, then the oil demand increase must be choked off to 0.7% (2008 average 86.6mbd) - less than 40% of the forecast increase.

The original forecasts imply an increase in energy intensity of around 2.6% - ie, the amount of GDP we get from a barrel of oil is forecast to grow by that proportion. This is higher than the historic average, but consistent with a world in which fairly major efforts are being put into energy efficiency and non-fossil-fuel energy sources. The implied supply-constrained world GDP growth is thus around 3.3% ceteris a lot of paribus.

How high would the price have to go to reduce world GDP growth by 1.2%? Big question that really needs a month or two of simulation runs on a high-grade economic model, but let's have a SWAG (sheer wild-assed guess) at it. We'll start by reference to one of those CNNmoney articles we quoted earlier.

When economists were predicting that oil wouldn't negatively impact the economy, they based their assertion on a price of about $80 a barrel.

But if oil stays at $100 a barrel for the next 12 months, consumers will have shelled out an extra $100 billion on oil by next year. That's an extra $100 billion not being spent at the mall, mega-mart or multiplex.

"The entire stimulus package could be drained by higher energy costs," Lafakis said, referring to the $120 billion lawmakers will refund to taxpayers in an effort to keep the economy out of recession. "That has the potential to turn a mild recession into something more dark."

So, extracting the meat from the fluff, it suggests that a $20 price increase takes $100billion out of US consumer spending on other stuff. The US total GDP is around $14trillion, so if we need to take it down by 1.2% we need to take out $168billion, which, allowing for multiplier effects on both the increase in spending on gasoline and the decrease in spending on other stuff, would be achieved by an oil price increase of somewhere in the $20 to $40 range, starting from the Dec '07 baseline of $100.

A $20 to $40 increase in the oil price might depress the US economy by the required amount, but would it be enough for the whole world? Well, not if the US dollar continues to depreciate, as that depreciation will mitigate the demand suppression impact of the increased price on the rest of the world's economies - to the extent that the dollar depreciates, the price increase in USD has to go higher to compensate.

The trade-weighted USD depreciation over the last six months (the period over which the oil price has risen $20) is 4% - so if that trend continues, we need to up the oil price by another 4-8% to get our 1.2% decrease in world GDP.

Voila, our SWAG for the average oil price in 2008 is between $125 and $150 - which at the low end is consistent with (though a little above) our pure short-term trend forecast for $120 in June and $145 at year end, and at the high end suggests a potential further acceleration in the price beyond even the current level - an average of $150 for the year would bring us near the $200 barrel by the year end, but that would almost certainly be much more damaging to world GDP growth than a mere 1.2% shortfall.

Price predictions, and petrol pump prices

So, I predict, with caveats all over, that the headline oil price will reach US$145 a barrel or more by the end of the year. While I'm at it, I predict that the Aussie dollar will reach (at least) parity with the US dollar over that same period.

What will this mean for petrol pump prices? After taking out 38¢ per litre in excise duty, and 10% GST (and assuming that the forthcoming budget doesn't change these), today's price (top of weekly cycle) of 146¢ per litre is pretty close to $1 per litre for the actual stuff. Since the $110 barrel hasn't kicked in yet, we can make a handy parallel from the $100 barrel to the $1 + tax litre. My forecast $145 barrel (at A$1=US$1) is thus $1.35 plus tax or $1.87 per litre at year end. If the current oil price continues to go up $1 a day (NYMEX peak overnight was $111), then we might hit the $120 barrel and $1.65 litre a lot sooner. Enjoy.



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Laura Bush calls for a global response to world food crisis

US First Lady Laura Bush called today for a "global response" to the world food crisis in remarks before the executive board of the UN food assistance agency in Rome.

"From Afghanistan to Africa, the United States understands that meeting people's needs for food is a global problem that needs a global response," she told leaders of the World Food Program.

Speaking days after making a lightning visit to Afghanistan, her third since the fall of the Taliban in 2001, Mrs Bush also warned that "those who use arable land to grow poppy instead of wheat are threatening their families as well as their neighbours".

Has Laura thought that the use of arable land to grow ethanol may also threaten their families and neighbors?

Estimates of the link between biofuel production policies and recent food price increases vary. The Washington-based International Food Policy Research Institute says 25 to 33 percent of the inflation is due to biofuel policies, while the United Nations’ Food and Agriculture Organization puts the impact at 10-15 percent.

Some believe the problem could worsen, however, because of the U.S. mandates for ethanol that are set to rise. In 2006, the energy bill called for 4 billion gallons of corn-based ethanol to be mixed into the country’s fuel system, but that mandate jumped to 9 billion gallons this year and nearly 13 billion by 2010.

The result has been a bigger burden on the country’s corn crop. About 20 percent of U.S. corn was used to produce ethanol in 2006, for example, but that percentage could jump to 30 percent this year, according to the Environmental Working Group.

Always be careful what you wish for

John Pratt: "Why don't they make some hard decisions toward moving us into alternative fuels? Increase the price of petrol and use the money to move our vehicles to natural gas."

Why don't they take wheelchairs away from cripples, and they might walk again? Necessity being the mother of all invention – it's about as ridiculous an argument. The world is simply not in a position to move away from traditional fuels overnight. Sure, it could be forced; however, people must accept the consequences, which won't be nice. Think extreme poverty for large numbers of people, along with social anarchy.

A good tax has never made a good business, and a bad tax has destroyed many a good business. I still find it amazing that people (after hundreds of years of evidence) find it hard to get their head around such a simple matter.

If we falsely create an industry it'll fail. It'll ultimately fail because it was unable to pass the basic test of competition. For all the money wasted in such an enterprise, something, much more worthy, will miss out. That could include: health, education, technology, future business etc. It always has ended, and it always will end, in tears.

The problem with hysteria is the unintended consequences it creates. Allowed to run out of control, all manner of kooky things begin to seem normal. Got a population problem, no problem, refuse health services to any person over fifty. That'll cut life expectancy and the world population in no time at all (actually, the most logical thing for a population in survival mode is to rid itself of the aged and infirmed). See how crazy things can get?

Unfortunately (for them), John Pratt, some of our greatest social planners have had the knack of finding themselves on the wrong side of their original plan. Some people might even call that universal justice.

Indigenous alternative fuels

Australia relies on petroleum based fuels for most of its transportation requirements. The implications of this reliance have been brought into the spotlight through rising prices. Oil reserves are limited and diminishing. Petroleum products produce highly polluting emissions, even before they enter the vehicle's engine. They have a heavy impact on the environment and public health. Fluctuating and rapidly rising prices create uncertainty and contribute to inflation. Australia relies heavily on overseas supply and, increasingly, on overseas refining. Reliance on Middle East supplies threatens our energy security. The only way that Australia can protect its economy and national interest from the inevitable dangers we face through continued reliance on petroleum based products is to embrace indigenous alternative fuels.

Australia has an abundance of natural gas. See Radio National's Background Briefing.

Australia's sitting on some of the biggest natural gas fields in the world - and other energy-starved, ravenous nations are starting to bid for it. Australia will have to do some soul searching about how much we keep for ourselves and who to sell it to.

What is the sense of exporting our natural gas while we import petroleum based products? Instead of Labor and Liberal politicians fighting over a few cents on the price of petrol, why don't they make some hard decisions toward moving us into alternative fuels? Increase the price of petrol and use the money to move our vehicles to natural gas.

You betcha it's a bubble

John Pratt: "A lot of analysts see this simply as a supply outstripping demand - it is in fact peak oil."

Every bubble eventually bursts, John Pratt - this bubble will be no different. For many older traders (I'm not old enough) this year has a very curious 1980 feel about it. Seriously, do some of your own research on the period. The resulting commodity recession lasted well on a decade. I've learnt to be very afraid of the words: Yes, but this time will be different. I remember hearing them buying commodity stocks when people all around were buying "dog hospital.com" etc. Back then, gold was "over, man".

My opinion is the bubble has been in the making for near a decade. It began with the bailing out of the dot con boom (loose monetary policy). It was pushed along by bailing out the real estate industry (loose monetary policy). It was pushed further by bailing out the CDO industry (loose monetary policy). It will end with no more Wall Street bail outs (tight monetary policy). There just aint no bailing out commodity booms.

It's time bubbles Bernanke started acting like a person in the real world, and not some kind of CNBC educated idiot. It's about time this clown made inflation priority number one (I doubt he even understands inflation), and started taking steps (making it known in no uncertain terms) the dollar will be defended. He does this - he kills rampant speculation in one king hit. It's about time the whole lot of this whole dog and pony show get their heads out of their asses, and into a place that is at least pretends to be Central Bankers!

The world's oil producers cannot keep up with demand.

Demand will drop sharply this year. If bubbles continues on his crazy path the price may not.

The US dollar is in free fall, unemployment is rising, the US is moving into recession.

The dollar isn't in "free fall"; that's a simplistic reading of the situation. The current plight of the dollar can be corrected. It merely takes understanding and conviction.

A recession (and nobody likes a recession) is a needed correction. The recession the USA will go through will be a lot worse than it needed be. Bubbles and his predecessor should've allowed mal investments to have been corrected a long time ago. His overly thoughtfulness toward the Street is going to cause many around the world more pain than needed be. I assure you the rest of the world won't be escaping his mistakes.

We have to get used to the rise of China, India, Russia and the Middle East.

None of these places exists on a sphere outside economic reality. You'll also find they are all suffering inflation (understated in the case of China). They are all affected equally by higher oil prices (in the case of the Gulf this transfers onto other products such as food). China is also using subsidies to keep prices artificially low (which will come back to hurt them).

The belief that China can use internal demand is a false belief. China has grown in leaps and bounds; however, many there haven't (at least half a billion in fact). The belief that the rest of the world will wear possibly a great deal of pain to appease China is ludicrous. Even if governments wanted this, it'll be political suicide (watch this become a massive political issue in the coming election). Of course, economically it isn't possible for China or India to continue on the current growth path without the rest of the world (especially the USA).

Bernanke either accepts the very real possibility of terrible stagflation or he doesn't. He either starts taking real action now or he doesn't. If this is beyond him he should be moved for somebody that will. Personally, I believe, he should never have been there in the first place.

So whose money is in the warmongering oil bubble futures?

Hi Scott, it seems some of what is happening is neither driven nor controlled, but very blessed by the oil company groups. Our friend who stayed recently, in charge of Western Europe for an Ivy League oil company, was quite candid about that.

Then again, if it is the hedge funds, and if the pension schemes also buy into that gambling and then we actually get peace in the ME and Israel doesn't bomb Iran, well ... think of the gawdalmity crash then.

Bit scary when world economic stability relies upon a country obliterating another with its nukes. The oil is far enough away from the gov centre. How long can the "upping of ante" straws piling up continue without the camel’s back breaking? When the ship of the desert sinks we may find some believed their own rhetoric.

So do the hedge funds crash or do we go to war over money, oil hegemony and Israel?

Neither would be the first time. Trumpets away.

How do people live in that region and not have ulcers? I have already declined four invites as I don't like radon in my soup and fried gametes for the kids. Their godparents just had six months in one of the targeted countries. How jolly annoying not to be able to visit , particularly as I have always wanted to go after studying its history. They had nerves of steel but said they were so so so glad to be back. Another friend is off to Oman, where the aluminium industry that NSW thinks it is building power plants for is now setting up with cheap labour and unlimited gas energy. Looks like another industry, like the steel to Vietnam, is about to disappear. The whole region there has more for it than China, as it has cheap labour AND unlimited energy, if the stability could be sorted out . The Haifa pipeline that Saudi wants requires the protection from Hezbollah hence that group’s interference too via Bandar, but peace and cooperation would work too. So much potential if willing to share the wealth and land.

I just wish the war mongers on both sides had all their children in the front line – that is what it takes sometimes to get peace. It is often the returned military than help the people learn the realities of war. And that spoils the spoils.

So much for the $12 a barrel of Murdoch vaunting from his pro-war media whore outlets. Perhaps that, or the pre Iraq war price of about USD28 is the proper price unless people are saying there has been a 600% increase in demand since then.

As it is a speculative oil price futures bubble that may involve many people's money, perhaps we should find out exactly whose money is invested in this roll of the dice so that we can be more aware of whose interests are served by those increasing and stoking the tensions. And what would happen to the US economy if that bubble did burst and peace and industry settled down in the region and Israel decided their borders and such were agreed by all and peace reigns ... yes, perhaps there are some who benefit from such tensions and perhaps it would be wise to know who is exposed thus financially. Wars have been waged for such.

Any data out there? I do hope JP Morgan has not been using our future fund, eh?

And Russia wins no matter which way it goes. Anyone notice that?


A perfect storm not a bubble.

Many analysts say that fundamentals, not speculation, are driving prices.

“I don’t know how else to say it, this is not a bubble,” Jan Stuart, global oil economist at UBS, said. “I think this is real. There is a whole bunch of commercial buyers out there who are spooked and are buying. You are an airline, right now, you’re scared. I don’t see who would buy at these prices unless they need to.”

Jeffrey Harris, the chief economist at the Commodity Futures Trading Commission, who was speaking before another Senate committee last month, said he saw no evidence of a speculative bubble in commodities. Instead, Mr. Harris pointed out to a confluence of trends that have contributed to the oil price rally, including a weak dollar, strong energy demand from emerging-market economies, and political tensions in oil-producing countries.

“Simply put, the economic data shows that overall commodity price levels, including agricultural commodity and energy futures prices, are being driven by powerful fundamental economic forces and the laws of supply and demand,” Mr. Harris said. “Together these fundamental economic factors have formed a ‘perfect storm’ that is causing significant upward pressures on futures prices across the board.”

David and Paul, I don't think this is a bubble. A lot of analysts see this simply as a supply outstripping demand - it is in fact peak oil. The world's oil producers cannot keep up with demand. We are going to have to get used to high oil prices. With millions buying their first car in China and India, where is all the extra oil going to come from? The US dollar is in free fall, unemployment is rising, the US is moving into recession. US demand may fall but still demand will grow.

In 2008 China , India , Russia and the Middle East for the first time will consume more crude oil than the U.S. , burning 20.67 million barrels a day this year, an increase of 4.4 percent over year earlier levels, according to the International Energy Agency. U.S. demand will contract 2 percent to 20.38 million barrels daily, the IEA forecast. (Bloomberg)

We have to get used to the rise of China, India, Russia and the Middle East.

US demand for oil may fall but so will the US dollar. Nothing will stop the demand for oil in China and India.

what will stop demand for oil in China?

John: "Nothing will stop the demand for oil in China and India."

Well, clearly there is a price which is high enough to do that. First there is a price that will stop growth in the markets that China supplies goods to, and that will slow demand in China. In the long run, China can only buy oil with hard currency earned from exports, but their reserves mean that's a long way off. And a lot of the growth in China comes from internal demand, so that doesn't rely on the rest of the world growing - but still, there is a price for oil that will depress it ... and if the Chinese demand drives the world price high enough, the export-led growth will stop there, too.

And then the riots in India and China will leave the demonstrations of this week in the shade. 

There's always an alternative

Necessity has ever been mother to invention. It won't be long before we see cars motoring along with a wood-fired gas producer in the back seat, or where the back seat used to be. My father had one in the '30s depression.

The oil cartel which has just, for the nth time, jacked up its prices for a holiday period, refuses to sell Australian condensed natural gas (CNG) at its tied house service stations. Unsurprisingly, thrifty inventors are finding ways round them, by making their own CNG at home from mains natural gas. The transcript of last night's 7:30 Report is not up yet on the ABC website. But see this, and that.

Where there's a will there's a way.

Two heads are better than one.

I could go on....

the price of wood

Ian: "It won't be long before we see cars motoring along with a wood-fired gas producer" 

... and soon after that the price of wood will double or treble - and soon after that some entrepreneur will cut down the remaining trees overnight ...  

Shades of Dr Seuss

Well, the Lorax warned us.

In my recent sojourn in the west I fortuitously caught up with an old friend. He spends most of his time overseas, a freelancer to the petro-chemical industry. We were talking about this and I mentioned that the last I had heard, coal could be liquified for $40 a barrel. His immediate response was "thirty two actually".

Draw your own conclusions, Australia has more coal than you can, literally, poke a stick at.

Ultimately it will all end in tears but I've revised my prediction upwards of my original fifty years.

Rarely I Worry, and I Did Say "Rarely"

David Roffey

Well, Paul, I certainly never said I though the market was rational, nor am I going to be Fooled by Randomness. This is a spike, and I'm pretty sure it will fall back again into the mid-$120s next week (and will bet on the Dow rebounding, too ...)

Well, normally I'd agree, however, the events of the last two days have got me wondering. A lot depends now on Dr Bubbles and his money printing motley crew (forget the hawk next week, this guy will want be talking like a f###### wedge tail eagle). Personally, I think any vestage of confidence in him has been blown to pieces (the end for him is certainly near). The guy can claim a lot things, not being warned, is not one of them.

I still stick by my end of year predictions (could even go lower). Unfortunately it won't happen for the "right" reasons. Spikes such as this are good if you make money (everybody loves that, and plenty was to be had), though, over the long-term they're not good for anybody! It's not the spike that's the worry for me; it's the conviction of the spike.

So you've read fooled by randomness? Not a bad book. A few things I totally disagree with, though, I think he sums up the general crux of life, and market pretty well. It's certainly worth a read.

May As Well Play Monopoly

Richard;  Paul, this is your bag. A threadstarter on the market collapse? Please?

There really isn't much point - my opinion hasn't changed. It's a monetary problem; it's always been a monetary problem. "Dr Bubbles" inherited it (and has done SWFA to change it). This isn't peak oil (not to say it doesn't exist), markets simply don't move that fast, and brutally, over something known about.

The EU guy (French of course) makes a couple of ill thought out remarks (actually hes just sealed the deal on interest rates); lets say he kicked in the door, well, everybody stampeded and burnt down the entire barn.

The problem for Dr Bubbles is the conviction the market did it with. The only thing I can take from that is a complete, and utter lack of confidence in the Fed. Dr Bubbles has had a million chances (time for the bs now officially  at an end). He either acts in the interest of everybody (the world) or he moves aside, or is moved aside, for somebody who will. America is going into a recession (even if Dr Bubbles refuses to look at it, and people are going to be hurt), that's now beyond question, how deep and severe is now in Dr Bubbles hands - and with captain Bubbles at the helm - I'm more than a little worried.

The problem with a commodity boom is the same as any other boom - when it deflates, it deflates - just how far depends on the size of the bubble (which is a whole other set of problems). Either the USA wants commodities priced in dollars (in which case it should start acting responsibly) or it doesn't. Personally, I think Dr Bubbles has lost the confidence of the market (been in this situation for a while, only now it's for all to see), and I don't see any coming back from that.

I'm loath to say it, but, maybe it's time for a Central Bank sit down. The current lot just cannot be trusted any longer (Dr Bubbles, and crew). Out with the old crew and in with the new is sadly the only answer the market will hear at this stage.

I've seen booms and busts, and I sincerly believe this is the most  critical time, I've personally witnessed.

Take A Photo Of This One

My God!

In all my life I've never witnessed anything like the last two days in crude. Forget my predictions, this shit has got really serious. Spikes are one thing, however, if this is not out of control it's on the borderline.

President Bush must do one thing he has yet to do - act like a President. I would call on him now to dismiss "bubbles" Bernanke - a liability that cannot no longer be justified. If this thing is not nip in the bud, and soon, we're all headed into an uncertain future (and I do mean everybody).

Sadly, it should've never got to this.

Richard;  Paul, this is your bag. A threadstarter on the market collapse? Please?

Rational spikes

Well, Paul, I certainly never said I though the market was rational, nor am I going to be Fooled by Randomness. This is a spike, and I'm pretty sure it will fall back again into the mid-$120s next week (and will bet on the Dow rebounding, too ...)

However, as I said at the end of the last trading month, I do think the fundamentals underpin a much higher price than $100. Last night's price doesn't mean much, because it doesn't get refined into real tankers of stuff for another couple of weeks. But if I'm right about the underlying fundamentals, then at the end of trading of the July contract on 20 June the settlement price will again be somewhere in the $120-130 range, and will have probably gone up on the last day, as the speculators exit and the people who really want oil in July come in.

However, the upside possibility is still high. If you accept my (not unique) view in the original article from February on what the supply and demand fundamentals for the rest of the year are, then I would expect an efficient futures market (hah!) to begin to get toward the $145+ level earlier. Note that I'd put that as being compatible with there still being world GDP growth. If the world goes ex-growth for a long period, then the price will indeed fall back sharply, but I don't think anyone will be happy.

Nothing like putting your .... on the line

So, I predict, with caveats all over, that the headline oil price will reach US$145 a barrel or more by the end of the year. While I'm at it, I predict that the Aussie dollar will reach (at least) parity with the US dollar over that same period.

Personally, I think that by year's end, oil will have moved in the opposite direction. That's not a criticism of the article (which is well researched), simply an opinion.

For me the three deadly sins of the commodity trading are:

1. The belief markets can be controlled (intentionally moved in a certain direction):

Whilst it may not be impossible for certain funds to do this in the very short term, it's impossible over the long term.

2. Markets are rational:

They're not, and never will be. Markets are made up of competing interests all with a different idea about "true value". This is something the peak oil people often fail to understand. Fact is a hell of lot of the market is random.

3. Underestimation of what the market has already factored in:

Any person that has traded for even a short period of time will find this out - often to their peril.

Okay, my opinion is that by year's end oil will be trading at around the $95-$105 mark. I also find it highly unlikely the Aus dollar will hit parity (not saying the worst for the USD is over; again go back to what is "already" factored in).

The continuing slowing world economy (believe it or not the Chinese market for example is off around 50% since last October) will begin to eat into record commodity prices - it's not if, it's when.

None of the above is to say oil hasn't got one or two more spikes left in it. It's to say the medium term view for me is downward. On any kind of retracement, key levels of support would be hit leading I believe to a revision on many forecasts, and sentiment. Although this only a very basic outline, sell can be my only action.

Naturally, I could well be totally wrong. They are called futures, and not presents!

On a clear winner

Ian MacDougall: "Well put, though probably not news to many readers of this site. Calling on governments to lower petrol prices must rank with searching for Noah's Ark or the Philosopher's Stone, as among the most futile of human activities."

The most a person can be master of is his/her own domain. Whilst the government doesn't have the ability to lower world oil prices, it does have the ability to lower taxes. The nonsense that a slight lowering of tax on oil is worthless is a baseless claim (it'll result in much bigger savings than most seem aware). That tax (oil) is passed on to all products (with a gasoline content in final pricing), and if a consumption tax comes into play, a product is taxed again. It's a classic tax on a tax which pushes prices, and of course in the present situation, inflation.

Mr Rudd came into office making clear intentions to improve "cost of living pressures". There is not one action, thus far taken, that does this. In fact some actions will make it much more difficult for many people. If Mr Rudd was serious about any of his promises he wouldn't have cut subsidy options for a large number of people.

Mr Nelson is right to ask for tax changes. Asking for tax changes gives a clearly stated intention, and also positions his political party to say no to tax increases - such as the disastrous carbon tax. If such taxes are ripping apart the English Labour Party; why wouldn't the exact same thing occur in Australia?

It's not a fluke that North America enjoys much lower prices than Europe.

New Australian Peak Oil Documentary

Folks, you might be interested to see this new documentary "Australia Pumping Empty". DVDs will soon be available via the Aquila Productions website.

Ed - if the embedding doesnt work the youtube link is here - http://www.youtube.com/watch?v=QO4CzgbFRio

Essential reading for B Nelson

Though to my knowledge he is not yet a Webdiarist (hence I don't put his name into bold type) Brendan Nelson would do well to read Johann Hari on the subject of the growing political unrest over liquid fuel prices:

The era that is ending began at 10.30am on 10 January 1901, on a high hill called Spindletop in south-eastern Texas. A pair of pioneer brothers managed to drill down into the biggest oilfield ever found. Until then, the dribbles of oil that had been discovered were used only for kerosene lamps – but within a decade, this vast gushing supply was driving the entire global economy. It made the 20th century – its glories, and its gutters – possible. Humans were suddenly able to use in one frenetic burst an energy supply that had taken 150 million years to build up. A species that died before the age of 40 after a life of boring, back-breaking labour spurted forward so far and so fast that today billions live into their eighties after a life of leisure and plenty.

Well put, though probably not news to many readers of this site. Calling on governments to lower petrol prices must rank with searching for Noah's Ark or the Philosopher's Stone, as among the most futile of human activities.

Still, people keep doing it. Trouble for Brendan is that they are only likely to vote for him once on that issue.

IEA May Market Overview: Do We Need More Oil?

The IEA has now online-released its 15 May Oil Market Report. It makes interesting reading, particularly the chapter with the title above, which appears to bear out a lot of of my reasoning (and doesn't support the more optimistic Lehman analysis released yesterday). So interesting in fact that I'm including the whole chapter - then still recommend that you look at the detail of the full report:

With oil prices reaching $125/bbl, calls for more oil are getting louder. But do we really need more oil? To answer this, we need to look at the current balances, forecasting risks and some of the market perceptions that may have been driving the oil price.

First, we need to step back from the detail and simply define that, in our opinion, this is a bull market driven primarily by demand potential outstripping slow supply growth – notably non-OPEC. With no slack in the system, prices have had to rise to choke off demand growth and bring the market into balance.

This report sees further downward adjustments to demand, and they may not be the last. Despite an aggressive cut last month in our US demand forecast, further downward revisions are needed this month. Official March European data are also exceptionally weak. We are currently treating this as a symptom of an early Easter together with price and weather distortions, but if it extends into April, we may have to trim demand further.

Other downside pressures may also emerge. Faced with the realisation that high prices may be with us for some time, several countries, such as Indonesia, are reassessing the budgetary reality of sustaining oil price subsidies. It will not be easy to unwind them (many countries are wary of civil unrest, and may therefore try to cushion low-income earners with other payments), but when such shifts do come, they could cause temporary downward shocks to demand.

It is, however, unlikely that there will be any short-term shift in the demand picture for China and the Middle East, the two key growth regions. China has recently entrenched its subsidy regime by deciding to compensate Sinopec and PetroChina’s losses with monthly payments, and there are again question markets over data. In the Middle East, there is increased discussion of the need for energy efficiency, but with higher oil prices more than compensating for higher domestic subsidy payments, an imminent slowdown in demand is unlikely.

On balance, though, despite continued strength in China and the Middle East, it would seem that the risks to demand remain on the downside. While consumers may be adjusting to high oil prices, the full impact of current high oil prices in excess of $120/bbl, if sustained, has yet to be factored into either behaviour or forecasts.

Looking at the other side of the equation, supply-side risks extend beyond ongoing project slippage and the approaching Hurricane season. In particular, rising food prices have put biofuels policies under scrutiny. While it seems unlikely that biofuel targets will be reversed in the near future, it is sobering to realise the amount of oil that would be need to replace them. Just offsetting the biodiesel and ethanol added to the US and European markets since 2005 would require around 1 mb/d of additional crude oil supplies to be processed.

The most recent data and estimates suggest that the oil market should have been in surplus for the past two months and should remain in that position for the rest of 2008 - as long as OPEC maintains output at current levels. From an OECD stock position such an outcome is not yet visible. Most likely, the restocking is taking place in non-OECD countries, where there are little data, while OECD refiners are adjusting for weak demand and seasonal 2Q maintenance through lower imports. So do we need more oil?

Consumer countries are calling for more OPEC oil to ease prices. They are right – it would. More crude would prompt a more rapid crude stock build and would improve refining margins, allowing more distillates to be produced. On the other hand, OPEC is saying that the market is well supplied, and that stocks should build. The issue here, as we have been arguing for the past 18 months, is one of stock levels and timing. The market can only express its demand for higher stocks in a supply-constrained market through higher prices. And if some players are determined to build stocks they have to do so in competition with those who need the crude to meet current demand – therefore creating a competitive upward spiral in prices. To the list of upward pressures we should also add perceptions.

By setting output at a level that should allow stocks to rebuild throughout the second and third quarters and indicating it would only address the level of stocks in September (when the economic impact of the financial crisis would be more apparent) OPEC was probably hoping to send a signal of stability and confidence to the market. Instead, the market saw a completely different message: producers were comfortable with prices above $100/bbl and they would not react quickly to replenish stocks or adjust output should demand prove unexpectedly robust.

There is also the perception of a ratchet effect from higher prices. OPEC may, with the exception of Saudi Arabia, have only a limited ability to raise output, but every member has the ability to cut output. Therefore, the perception is that with spare capacity at low levels, OPEC can support a higher level of prices. If traders feel OPEC is signalling it is comfortable with $100/bbl, then fundamentals are appraised from that new base. OPEC’s silence as we neared $120/bbl raised perceptions of an even higher floor.

OPEC’s focus on stocks as a barometer of adequate supply reinforces this perception. Basic economics would argue that if prices move higher than the equilibrium level where supply equals demand, then there should be a tendency for stocks to rise. By cutting supplies to reduce stock levels, a higher equilibrium price is achieved, further reinforcing the ratchet effect. These are, however, just perceptions. They could change easily, particularly if stocks build rapidly.

There are some early signs of changing market conditions. Brent and WTI forward spreads are close to contango, implying that that either stocks are building or that storage is being booked to take crude. Reports of a large build in floating storage for Iranian crude have also emerged in recent weeks. This may give the market greater confidence that a ‘normal’ 2Q stock build is underway. But even if we can see this process beginning, the truth is that due to the lack of weekly stock data outside of the US and Japan, any second-quarter OECD stockbuild will not be fully apparent until mid-July. In addition, given the magnitude of recent OECD revisions, end-June inventory levels will not be known accurately until September.

The key question is how to halt the upward spiral in prices. Clear evidence of a seasonal stockbuild would help. OPEC could kick-start the process by giving at least a clear indication that it will rapidly provide more oil if stocks do not build in the very near future. An even more powerful signal would be to provide more oil now. To the extent that current prices also embody an element of concern over future supplies, an ongoing commitment to investment would also help.

High petrol price forces motorists to switch to public transport

SOME rail passengers are being left behind on platforms and bus commuters are enduring long queues as motorists baulk at the soaring price of petrol and switch to public transport.

Morning peak-hour numbers on CityRail vastly exceed the State Government's "high-growth" predictions, and bus corridors are suffering a commuter crush.

There has even been a surge in demand for inter-city Greyhound coach services.

The rush for public transport comes as motorists begin to ration their petrol use. Sales of unleaded petrol fell by 4.4 per cent in the first three months of the year.

The high price of fuel is causing motorists to switch to public transport. This is just what is needed to reduce our GHG emissions. But as the price continues to rise can our public transport systems cope? Governments are spending billions on roads when the money would be better spent on public transport.

Governments have known about peak oil and climate change for years and have done next to nothing. The public transport system in most Australian cities is underfunded and will not be able to cope with the increasing numbers as we move out of our cars and back to public transport.

All so short-sighted

John, if the decline in petrol sales is due to price rise, (and that has been queried), then I would think that decline is likely to continue as more and more people try save on petrol in a tight family budget. I have no problem with that as clearly a decline in fuel consumption has its advantages.

But as you say the urban pubic transport system is under real pressure and is not coping too well. But so too is the country system.

Being one who would rather pay a few dollars to go by rail than drive a car I have been dismayed over the past few years as the country rail passenger network went into rapid decline and services were discontinued. Tracks and bridges on even the main southern line are so old and rundown that trains rarely run on time anymore as they reduce to a crawl over the worst spots. Often services terminate well before the desired destination and buses are used to carry the passengers the rest of the way.

Even main and well used services such as that between Sydney and Dubbo, a major inland centre of over 30 000 people, was destined for closure. Only public outcry led to its retention. Minor branch lines are now all overgrown with weeds and grass and deteriorated beyond repair. This includes many that were once used to transport the state's grain crop, and those remaining lines are now also under threat of closure.

Freight trains that were once so frequent on the main southern line are quite a novelty to see these days, but when one does see them they often have over 100 carriages. That means 100 fewer juggernaut trucks on the road for each such train.

But clearly all the thinking is in terms of road freight as huge distribution hubs are planned close to the main north south highway, the Hume. At the same time the eastern interstate inland freight rail line has been put on the backburner. A large number of trucks ply the inland highway between Adelaide, Melbourne and Brisbane. The Newell is a nightmare to travel on. An inland rail link would make so much more sense.

Given the oil supply situation this dependence on road freighting is all very short-sighted and can only result in never-ending price increases for essential goods. Where it once cost about $25 to truck a beef beast to a meatworks in southern Queensland from around Gilgandra (a distance of around 900 kms), it rose to $70 when the fuel hit $1.20 a litre. God knows what it will be now diesel is above $1.80. That is one of the main reasons we abandonned livestock raising. As usual farmers are being forced to carry much of the cost hike and cannot pass it on.

Milk is another essential item to watch. Sydney's milk is transported long haul since the dairy industry left the coast and tablelands and moved inland to the irrigation belt. Adding the huge fuel cost impost of getting the milk to Sydney onto the skyrocketing costs of production due to drought and lack of irrigation water will mean the price of milk is going to rise significantly - that is, if farmers are going to stay in production. Murray Valley farmers supplying Melbourne are being forced out due to lack of irrigation water and high fodder costs.

All this is hardly going to help the grocery budget, and inflation.

Governments need to start thinking rail and quickly in my opinion, as the pressure on oil supplies is only going to increase. But all the indications are that heads are well and truly in the sand.

SMH confused

Two articles published n the same day, first in the printed paper:

 Rebound in supply to curb runaway oil: OPEC's monthly report says that demand this quarter will average 85.75 million barrels a day. Supply was 86.8 million barrels a day in April.

and then at 2pm on the website:

Oil traded higher at more than $US132 a barrel today as the US summer driving season kicked off, underscoring concerns that output was inadequate to meet rising demand.

Of course might be explained by the fact that the figures in the morning article come from OPEC, who say there's no supply problem, and not from the IEA, who think there is (supply 87.3mbd  - including the increases identified  as "unexpected" in the first article - demand 88mbd).

Make a decision today. Be honest: the high petrol price is good

Dr Nelson says that is too long to wait for relief, and he is challenging Prime Minister Kevin Rudd to adopt his plan to cut fuel excise by five cents a litre.

"For God's sake Mr Rudd make a decision. Don't form another committee," he said.

"Don't tell Australians who are trying to fill up with petrol today, trying to feed kids, and trying to feed their mortgages, don't try and tell Australians you're going to have a committee that will report in 18 months and might take four cents a litre off the price of petrol.

"Make a decision today."

With both the government and opposition trying to reduce the price of petrol by a few cents, do they think the Australian public are fools?

Tell us the truth!

If they were honest they would be preparing us for even higher petrol prices and that a high petrol price is good. The more expensive petrol becomes the more we will try to be reduce our fuel consumption.

If the government wants to save the long suffering motorist help them make the transition to fuel efficient vehicles. Driving a car that runs on 5 litres per 100 km rather than 15 litres per 100 can save the average motorist at least $50 dollars a week.

The government should reduce the taxes on fuel efficient cars and increase the tax on petrol. A carbon tax on petrol is what we need, for the good of the planet.

Price boost from real oil buyers (and T Boone Pickens)

I'm interested by the fact that in both of the last two months there has been a significant price boost on the last day of the contract - last night to settle at $129.07.

The reason this is interesting is that the people who ended up with the contract at the settlement price yesterday actually have to take delivery of the real oil - so these people who added $2 to the price yesterday are not speculators - they're real oil buyers.

Added to that, we've gone back into contango, which is to say that the futures price for later months contracts are even higher than the (now dead) June contract - up to $136.99 for the furthest future traded. This means the traders see the next moves as up not down (perspicacious, eh).

Meanwhile, real (not speculative) oilman T Boone Pickens weighed in on the side of my predictions, saying he expected to see $150 later this year "because supply isn't keeping up with demand". (Of course, as has been discussed elsewhere on this site, Pickens is personally speculating on a 4 gigawatt wind farm). 

Update on supply and demand

Official figures for 1Q2008 show demand and supply both at 87.3mbd.

If so, the rise of 25% in the oil price over this period (from $100 to $125 - nice easy math) came without demand actually exceeding supply in total. If so, I might have been too cautious in my predictions for the potential rise over the next few quarters if demand seriously exceeds supply in any quarter. However, it is said that there is a lot of heavy crude slopping about the world in tankers with no takers, so it's possible that there was a serious shortage of light sweet stuff behind the price rise.

Oil at $200 or $40 ?

A new Goldman Sachs prediction that oil prices could rise to $150 to $200 within two years seemed to motivate much of Tuesday's buying, although a falling dollar and increasing concerns about declining crude production in Mexico and Russia contributed, analysts say...........

Not everyone shares Goldman's view. Tim Evans, an analyst at Citigroup Inc., countered Goldman's analysis with a note predicting that crude prices could as easily fall to $40 a barrel as rise to $200 over the next two years because supplies are, as Evans put it, comfortable.

The price of oil hit record highs again today, analysts are saying the price could be between $40 and $200 within two years. The oil price has been rising steadily since 2001, it is hard to think of a circumstance that would change the trend. The fact is supply cannot keep up with demand.

Based on the data from the National Bureau of Statistics of China, China's economy began to grow rapidly from the 1980s and even faster after 2000. oil demand is proportional to the fast economy growth. Fig. 6 indicates that the correlation coefficient between China's gross domestic product (GDP) and oil demand is 99.5%.

The BP Statistical Review of World Energy 2007 says that China's oil demand growth is one of the fastest in the world, increasing by 7.4%/year in the recent decade. China's oil demand has reached 350 million tpy in 2006, second only to that of the US. oil demand because of the fast growing economy still has a potential to grow rapidly. At the same time, China's oil production is growing slowly, only by 1.5% in the last decade.

This gap between demand and production has reached 166 million tpy, and it seems that the gap will become larger in the future.

If we take in China's growing demand for oil it is hard to see the price of oil falling, not to mention India and the rest of the developing world.

Economic growth of more than 8 percent in China and India, coupled with increasing car ownership among the countries' combined populations of 2.45 billion people, will more than compensate for falling U.S. demand. Oil use worldwide will increase 2 percent this year because of growth in emerging markets, the Paris-based IEA says.

I think we should be prepared to pay at least $200 in the next two years and who knows what we will be paying for oil in five years time?

A Slight Correction About Europe

It should be obvious from the cost of food (amongst many things) that gas prices affect the third world a lot more harshly than the first. Basically what you are seeing is a decline in the US dollar reflected in the oil price.

Note: This may read that I'm equating Europe (first world) to the third world (writing of British elections). It should read that if Europe is feeling the effects imagine the effects on the third world.

Green Force Running Out Of Force

Jenny Hume

The least we could do in Sydney is as in London - get the cars out of the central city. It is time to legislate as many cars off the city streets as possible. People need to be forced to make the changes that are going to be so obviously needed in terms of protecting the environment and conserving oil reserves. The one person, one car to work policy has to change.

The restrictive "green taxes" were a major reason for the British Labor Parties recent decimation. It's obvious people talk a lot of turkey about such things; that is, until it comes to paying the piper. One conservative guy on the Guardian blog summed it up very succinctly. He said they (Labor Party) just kept thinking of more, and more taxes (or force). These people (Labor Party) had lost touch with the average citizens reality. The stuff they were proposing was "manna from heaven" for us (Conservative Party).

It should be obvious from the cost of food (amongst many things) that gas prices affect the third world a lot more harshly than the first. Basically what you are seeing is a decline in the US dollar reflected in the oil price. This in turn is making US industry a lot more competitive, along with pushing up commodity prices across the board.

The current situation has put the EU in a very strange position. A position were they're basically calling for something that is doing them the most damage. The "green taxes" are helping along inflation which they're finding hard to deal with because to do so is helping US industries at the expense of their own. It's becoming clear (if the UK results are anything to go by); this particular situation (the world's Mr environment nice guy) is fast running out of steam.

It's also very interesting watching the Clinton attack on China. Strangely at a time free trade is beginning to favor many up and coming nations - United States politicians are hinting at a few restrictions. Nothing like changing the rules to suit a certain result I suppose. America, strangely enough once decimated UK industry during the Victorian era through restrictive trade measures. He who owns the gold makes the rules as they say. Australia will come to celebrate the day that it did sign the free trade agreement with the USA - and that you can take to a AAA bank.

Three Predictions:

1. The so called "food crisis" will be used as an excuse to keep the third world out of agricultural markets in the first (no surprises there).

2. The USA will move very much toward a "favored trade status" of nations. The days of Bob Zollick will become equivalent to the dinosaur's.

3. The up coming "climate disaster", will like actual global warming, start to become a lot cooler, in political circles. In Australia this will become apparent the day a "green tax" is not put on gasoline.

The game of world economic power has unfortunately never really been fair. Unfortunately I don't ever see this changing in my lifetime.



Oil passes $120

BBC report


So, solidly above $120 by June, I'd guess, keeping my SWAG holding up well. 

A lot of pain ahead

The least we could do in Sydney is as in London - get the cars out of the central city. It is time to legislate as many cars off the city streets as possible. People need to be forced to make the changes that are going to be so obviously needed in terms of protecting the environment and conserving oil reserves. The one person, one car to work policy has to change.

The price of oil is already doing considerable economic damage all over the world. The Government is worried about inflation, but how can we rein in inflation? As families are being squeezed by interest rate hikes they are forced to cut down on discretionary spending, but the essentials are all inflating at well above the average rate due to the increasing price of oil.

As for any argument that one category of items in the basket is not the true indicator of inflation - well, bananas to that. 

Household expenditure is going to continue to rise no matter what the housewife does. It is now out of her or his hands to a large extent.

A lot of pain ahead I think for a lot of people.  

Maybe at least $2.50 a litre by xmas

Diesel is now $1.80 in some rural areas of Tas and nowhere in Hobart or surrounds can you buy it for less than $1.74. I bought some fuel for my chainsaw yesterday and got it for $1.33lt of ethanol unleaded blend at united, up the road closer to and in Hobart it was $1.54 for unleaded.

I read where the Queensland government is going to buy more than 100 new buses for Brisbane, but I bet not one will be run on alternatives like electricity or biodiesel. I read yesterday that gas pollutes as badly as petrol, as the process needed to freeze it for storage and transport is a heavy energy user. Yet they give more than $4 billion dollars a year in subsidies to the fossil fuel industries and virtually nothing to alternatives. Why is it natural gas prices continue to rise when their production costs and availability hasn't changed much except for CPI rises? It may be our decline will be more rapid than anyone expects or hoped, yet it seems our leaders are doing the opposite to what reality requires and the world's multinational conglomerates are only interested in profit, not sustainability.

Oil might reach $200 by 2012.

Oil prices might reach more than $200 by 2012, he said, a level that would probably mean $7-a-gallon gasoline in the United States.

Some regions are simply running out of reserves. Norway’s production has slumped by 25 percent since its peak in 2001. In Britain, oil production has plummeted 43 percent in eight years. The North Sea is now considered a dying oil basin. Alaska’s giant field at Prudhoe Bay has declined 65 percent since its peak 20 years ago.....

The International Energy Agency estimates that current investments will be insufficient to replace declining oil production, let alone increase overall output. The energy agency said it would take $5.4 trillion by 2030 to increase global output, a level of investment that is unlikely to be met. It said a crisis “involving an abrupt run-up in prices” could not be ruled out before 2015.

This report was in this morning's New York Times.

If you think today's fuel price of about $1.50 a litre is expensive I hope you are prepared for $3 a litre or $4 maybe $5 a litre if we price in a carbon tax.

The international Energy Agency says an investment of $5.4 trillion is needed to increase global output. Surely this money would be better invested in alternative energy sources.

If you think the oil situation is bad, worse is to come

Jad Mouawad in The Age today on the oil situation:

To many experts, the steadily rising price underscored longer-term fears about a system that has supplied cheap oil for more than a century.

"This is the market signalling there is a problem, that there is a growing difficulty to meet demand with new supplies," said UBS global oil economist Jan Stuart.

Today's tensions are only likely to worsen in coming years.

Jad then runs through the numbers. The human population on this planet up 50% by 2050; the number of cars and trucks on roads around the world (and consuming fossil fuels) doubling by 2040; the number of passenger planes zooming around the planet (and consuming fossil fuels) doubling by 2030.

All of that will require a lot more oil — enough that global oil consumption will jump by 35% by 2030, according to the International Energy Agency, a leading global energy forecaster for the US and other developed nations.

Producers will have to find and pump an additional 11 billion barrels every year.

Two options then: the smart one and the stupid one.  The smart one is to find ways to reduce consumption of fossil fuels; the stupid one is to keep feeding the addiction to fossil fuels.

$200 a barrel by xmas

The rises were supported by fears of further attacks on pipelines in Nigeria and oil cartel Opec's refusal to raise quotas to curb rising prices.

Comments that it will raise production in 2012 failed to dampen sentiment. “

Could be they won't raise quotas because they can't? We passed peak oil in 2005 and you can't get more oil out of emptying wells. Sure there is lots of oil locked up in shale and coal, but the method for extracting and converting this into fossil fuels is not only extremely expensive, but highly polluting. We will probably see oil at $200 a barrel within 12 months, which will destroy most of the world's economies that rely solely upon oil products for their economic survival as Australia and other major economic clones do.


Oil prices have touched fresh highs as traders bet that violence in key producing nations will hurt supply.

US light, sweet crude rose as high as $119.90 a barrel, before closing at $119.37. London's Brent crude peaked at $116.75 a barrel.

The rises were supported by fears of further attacks on pipelines in Nigeria and oil cartel Opec's refusal to raise quotas to curb rising prices.

Comments that it will raise production in 2012 failed to dampen sentiment.

Smile when you fill your tank.

Oil jumped to a record on Monday, and gasoline prices rose above $3.50 a gallon for the first time across the nation, according to AAA, the automotive group, as fears about energy supplies and a falling dollar drove prices to new records.

Gasoline has risen 22 percent in the last year, and some analysts expect prices close to $4 a gallon this summer, typically the time of the year when demand is at a peak.

Diesel prices reached $4.20 a gallon on Monday, on average, compared with $2.93 a gallon last year, according to AAA.

Despite a slackening global economy, the bull market in energy prices is showing no signs of slowing. Oil futures closed at $117.48 a barrel on Monday, up 88 cents, a record on the New York Mercantile Exchange. Oil prices have more than quadrupled in five years.

Some analysts expect oil prices to reach $125 a barrel this year.

Oil prices continue on their way up to $150 or more. It makes a few cents the ACCC says we may save look a little sick. We should come to terms that oil is going to go up and up. We will also need to add more to the price when we price in a carbon tax. Eventually we will all learn to use energy more wisely and we will drive more efficient vehicles. I have recently sold my Ford Fairmont and bought a Honda Jazz. My consumption has gone down from 15L/100km to 6L/100km more than halving my fuel bill. I smile now when I fill up.

Fill up your tank

John Pratt, why don't you do what I do? Every Tuesday I put $50 worth of petrol in my car. If the price goes up it does not worry me as I just put in $50 every time. So it is costing me $50 per week.

Time For Green Celebration?

Since we're on a predicting thread:

According to T. Boone Pickens, the solution to the energy crisis might be “in the air.” The legendary oilman told CNBC he’s investing $10 billion in a major wind-power deal. Should you trade the trend?

And indeed he expects to turn a big buck (from the world's largest wind farm). He says (as I've written on numerous occasions) as the price of oil rises, so will the competition from alternatives. Pickens (if successful) will prove that indeed the free market does have the answer - and a very profitable answer at that - an answer that will indeed be a major bonus for American freedom, and capitalism.

My prediction: So called green types won't jump aboard this project. Exactly because it is "free market capitalism" - and of course most of the current bunk, and hysteria, isn't about peak energy etc at all. It's about anti Americanism that has its real roots in anti capitalism.

Lets all just wait and see how wrong I am, shall we?

We'll see then

How wrong you are, Paul.

If commercial projects like T. Boone Pickens' planned $10bn clean energy project has the effect of reducing US carbon emission levels, then "green types" worldwide will be happy ... and many will be making money, which they'll be able to reinvest in further profitabe "sustainable living" ideas.

You see, your basic assumption is plain wrong. You operate from the assumption that "It's about anti Americanism that has its real roots in anti capitalism."  Yet the reality is that a great many million "green types" around the globe are comfortable with capitalism, and millions are also American.

Economic renewables

I've been saying for some time that the $100 barrel is the magic bullet for a number of renewables: Picken's windfarm is only one of many projects that become economic compared to fossil-fuel alternatives at current oil prices, even without pricing the carbon externalities into fossil-fuels. Once the cost of carbon begins to be priced in as well, then wind, wave, solar and geothermal become projects that don't have to be subsidised for the public good, but will earn a reasonable return in their own right.

Three years ago we rejected a plot to put 20 PV solar panels on our roof, because it was going to cost $35,000, save $1,000 a year off our fuel bills, and last ten years before needing replacing. This year's equivalent will cost $24,000, save $1500 off our annual fuel bills and be guaranteed for 25 years. That has a positive real rate of return even if you don't assume fuel prices will rise by more than inflation, which they surely will.

So, I'm green (but not Green), and I think that the oil price is just great, my predictions for it an even better idea, and the growing evidence that renewables are attracting real funding excellent news.

Oops, $117

Another $1.83 added overnight. Looking like my prediction of $120 by June is going to be overshot (though the market usually stops for a breather after hitting the next decade, so it may still be in the low $120s in June ...)

If maintained, expect metro ULP price to cross $1.60/l the week after next ... Expect Brendan Nelson to say that this proves that FuelWatch doesn't work, even though it hasn't started yet.

If the price falls back to (say) $114, expect big headlines saying "Oil price falls", so that people can feel bad about the oil companies and the $1.50/l that will be becoming cemented in. And expect Eliot to be claiming that the fall proves I'm just scaremongering. 

Con job of the highest order

In Tasmania, diesel in our area is between $1.66 and $1.75. leaded is $1.43 to $1.54. There's a couple of interesting things to this subject, I believe Australia only gets $6-$10 royalties for a barrel of oil from oil companies. The price of production has not risen in many years, yet oil companies sell the oil to their Australian subsidiary for more than $100 in Singapore, add their transport and refining costs and sell it to the public for massive profits. Yet the oil never leaves the country and is piped directly ashore for refining at the same cost as 25 years ago, just like natural gas. But with gas, there are no refining significant costs, just piping drying and bottling. Yet the prices are rising just as fast if not faster than the rate of petrol.

Then we have the weird anomaly of diesel being so much more expensive than petrol in Aus, yet it’s much cheaper overseas and has refining costs of less than half petrol. Before the Australian lab/lib coalition government introduced an excise rebate of 38 cents a litre for off road and marine engines, and half for road transport, the price of diesel was more than 15 cents cheaper than petrol. Now, it's more than 20 cents dearer and the farmers and fishermen as well as people with remote power requirements have lost their rebate and are paying even more.

So it's really just a con job and grab for huge profits as peak oil passed three years ago and we are now on a rapid road down regarding oil fuels. Yet not one thing is being done to change our approach, just more roads, more subsidies for oil companies, and not one real dollar for alternative or new non polluting forms of transport. I wonder how long it will be before the majority of people actually wake up to the fact that we are being conned into economic slavery, with the only ones being able to have private transport being the elite and security forces, ending up as another Zimbabwe or Burma. Still we should say nothing and just bow down to the superior stupidity of the ruling elite, as they are always right.

Basically this is who is in control of our oil and gas, not us but a multinational conglomerate. They don't appear to be even listed on the ASX and don't mention it at all, so the profits from our oil, go overseas. Truly a great business plan, if your interests are with ACOR and other multinationals as our politicians are.

Diesel reaches $2.08 ULP $2.05

David, I think you may have been a little on the conservative side. People are already paying over $2 a litre.

Andrew Mayne from the homestead has told ABC Radio's Country Hour program he has no choice but to charge more than $2 a litre for fuel to stay in business.

"You're looking at paying about $2.08 for diesel at the moment, $2.04 for ULP, $2.05 for pulp and $1.09 for LPG. It is a record," he said.

"Every drop we've had so far for the last six months has been a record and it's even looking like it might have to go even higher at the next fuel drop."

Driving around Cairns this morning I saw diesel prices of $1.58 and ULP at $1.48. Spare a thought for the people in the NT who are already paying over $2 a litre. I suspect we will some sort of carbon tax shortly which will take us up towards the $3 mark.

$2.27 a litre

No news to me, John, having been charged $2.27 a litre by Hertz at Tullamarine for having returned a Yaris unfulfilled.

On the other hand, these kind of one-offs (Hertz and a remote NT station) aren't what I was talking about, really. I can't see why anyone is surprised that we've gone beyond $1.50 in the cities while WTILC is trading at $115. If it stays there, then around $1.58 would be likely, at least on Thursdays.

I'm also irritated by the idiocy of most discussion on the Fuelwatch scheme. It clearly has no possibility of having any downward impact on prices of itself - the point is to be able to let you know where the cheapest fuel is, on those days like this Wednesday when there was a 14¢ difference between the dearest and the cheapest fuel in an area. Over the long run, if that causes enough customers to be arsed to drive many kms to save around $3 on a tank-full, it might cause them to pitch their prices at the lower end of what they were going to charge anyway, but that's about it.

Fuel prices

John Pratt, what are you worried about? Haven't you heard about Kevin's FuelWatch program? When this kicks in he will be saving you heaps.

Something wrong here

As the $US falls so the value of other currencies rise. What would be more useful as a guide is the price quoted in a trade weighted index. International currency anyone?

Oil price soars to record high above $US110.

Oil prices soared to new record highs overnight on news of an unexpectedly sharp drop in US energy inventories and a further decline in the value of the dollar.

New York's main oil contract, light sweet crude for delivery in May, jumped $US2.37 to close at $US110.87, after hitting an intraday record of $US112.21.

In London, Brent North Sea crude for May, struck an intraday all-time high of $US109.50.

The US Department of Energy said that energy stockpiles in the United States had dropped across the board during the week ending April 4.

David Roffey, your prediction of $145 a barrel seems to be about right. The oil price continues to climb as the US dollar falls. The high cost of energy is not going to help the already struggling global economy.

Biofuel subsidies causing a food crisis.

Over the past few years the prices of wheat, corn, rice and other basic foodstuffs have doubled or tripled, with much of the increase taking place just in the last few months. High food prices dismay even relatively well-off Americans — but they’re truly devastating in poor countries, where food often accounts for more than half a family’s spending.

There have already been food riots around the world. Food-supplying countries, from Ukraine to Argentina, have been limiting exports in an attempt to protect domestic consumers, leading to angry protests from farmers — and making things even worse in countries that need to import food.

The subsidised conversion of crops into fuel was supposed to promote energy independence and help limit global warming. But this promise was, as Time magazine bluntly put it, a “scam.”

This is especially true of corn ethanol: even on optimistic estimates, producing a gallon of ethanol from corn uses most of the energy the gallon contains. But it turns out that even seemingly “good” bio fuel policies, like Brazil’s use of ethanol from sugar cane, accelerate the pace of climate change by promoting deforestation.

And meanwhile, land used to grow bio fuel feedstock is land not available to grow food, so subsidies to bio fuels are a major factor in the food crisis. You might put it this way: people are starving in Africa so that American politicians can court votes in farm states.

Oh, and in case you’re wondering: all the remaining presidential contenders are terrible on this issue.

The high price of oil, drought and subsidies to bio fuels are causing a tripling of the price of the world's basic food supplies. A moral dilemma  for the US.

Also, they don't wear lederhosen?

Mark Sergeant: "My understanding, Eliot Ramsey, is that there is a lot more to the European Union than a free trade agreement. Dylan pointed to the Eurozone, which applies to a pretty large subset."

And my point is these are mere administrative technicalities that don't alter the fact if you aggregate the economic activity carried out by NAFTA member states it out-produces the EU. And is way ahead of China.

What next? NAFTA "doesn't count" because mostly they speak only Spanish and English and don't wear lederhosen? 

Not "Mere Technicalities"

Eliot: "...my point is these are mere administrative technicalities that don't alter the fact if you aggregate the economic activity carried out by NAFTA member states it out-produces the EU."

No one is arguing with the fact, in aggregate, the economic activity of NAFTA states exceeds the EU. What is disputed is whether comparing the combined GDP of the NAFTA states or the EU to individual states or the eurozone is valid. I continue to maintain it is not.

The reason NAFTA is not comparable with the eurozone has nothing to do with the language or the preferred clothing of the locals. It has everything to do with the substantial structural and functional differences between the two institutions.

The difference between NAFTA and the eurozone is not simply a matter of "mere administrative technicalities". Indeed, there is nothing "mere" about it. The eurozone's monetary policy is not decided by each of the 15 states individually but by the European Central Bank. It is an independent institution with the "exclusive right to set interest rates" in the eurozone. This is no small task and no small surrender of sovereignty by the eurozone states - it is no 'mere administrative technicality'.

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